Fannie
Mae's latest financial disclosures belie the SEC's allegations against former
company executives. The government lawsuit claims that the company understated
its "true," holdings in subprime and Alt-A mortgages back in
2007-2008. Yet four years later, Fannie still refuses to change the way that it
calculates and reports its exposure to subprime and Alt-A mortgages.

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Go
to the Fannie Mae website if you want to see a slap in the face to the SEC.

As
you may remember, the securities regulator caused a big stir last December when
it filed lawsuits alleging
securities fraud committed by former Fannie Mae and Freddie Mac executives.
According to the complaints, these executives directed the companies to
understate their "true" exposure to subprime and Alt-A loans.
At the same time, Fannie and
Freddie had signed Non-Prosecution Agreements, which were viewed by some as an
admission of culpability.

In
a nutshell, the SEC alleges that for year-end 2007, Fannie falsely represented
its subprime loan total as $5 billion, when the actual number was closer to $48
billion. And it falsely represented its Alt-A total as $311 billion, when
in fact it the true number was more like $634 billion.

What
went largely unnoticed at the time is that the non-prosecution agreements imposed
no requirement that the companies restate or change the manner in which they
present their subprime and Alt-A exposure. In other words, the SEC is pursuing
several lawsuits, which consume scarce resources and may drag on for
years, but it took no steps to protect the investing public from any continued
dissemination of these so-called falsehoods.

So
yesterday Fannie Mae released its financial results for the year, with its
usual press
release, 10-K,
and Credit
Supplement. Check out pages 5, 6, and 9 from the Credit
Supplement, and you'll see that Fannie's methods for calculating its subprime
and Alt-A exposure have not changed in the least. Investors holding trillions in
Fannie Mae bonds are still being "deceived" in the same way that they
were in prior quarters and prior years. (Compare the Credit Supplement issued
for the prior
quarter, or any other quarter, to validate this point.)

One
of the fatal flaws in the SEC's lawsuit was best described by U.S. District
Court Judge Paul Crotty, in a ruling wherein
he dismissed most, but not all, of the causes of action against Fannie its
senior management. The private lawsuit alleged similar, but not identical,
violations of securities law. Judge Crotty wrote, "A plaintiff
cannot state a claim by citing snippets of corporate disclosures and alleging
it is misleading; rather, such disclosures must be 'read as a whole.'"

Since
the financial filings use definitions for subprime and Alt-A that are not
precise and exact, the investor must read everything in the public disclosures.
If the critical information is stated in a different way, or in a footnote, so
that the investor can figure out what's going on, he cannot allege that he has
been harmed by securities fraud.

As
it happens, Judge Crotty will preside over the SEC's case against the Fannie
Mae executives.

For
a more complete takedown of the flaws in the SEC's case, go here and here.

A
Possible Backstory To The Lawsuit

So
why is the SEC proceeding with such a flimsy case? My guess that the true
motivation was political, as a sop to the Republican members of Congress
who are doing everything they can to slow down agency's efforts at
policing the markets. Consider Darrell Issa's "inquiries," into the timing
of the SEC lawsuit against Goldman Sachs, into the timing
of the the settlement with Goldman Sachs, whether S.E.C. regulations are too
burdensome.

The
announcement of the SEC lawsuit was touted as vindication professional
liars who promote a standard republican narrative about the
history of the mortgage crisis. Since late 2008, Peter
Wallison of the American Enterprise Institute has been touting the
ridiculous notion that Fannie and Freddie caused the mortgage crisis because
they held $1.6 trillion (later upsized to $1.8 trillion) in "subprime and
otherwise risky" mortgages. This metric was repeated endlessly by
right wing think tanks and academics, and in a New York Times bestseller,
Reckless
Endangerment. It has also been conclusively debunked by the FCIC and
by the Center
for American Progress.